2.1 Introduction

For many years, policy discussions have focused on strategies to bring down greenhouse gas emissions using taxes, permits and other regulatory or statutory limits. Yet fossil fuel markets across the world remain littered with government programmes subsidising these emissions. The subsidies are large and act as a negative tax on carbon, slowing the transition to cleaner fuels, weakening the impact of carbon constraints and absorbing a significant portion of government revenues in many countries.

These factors have increasingly led governments and international organisations to view fossil fuel subsidy reform as an important carbon mitigation strategy and fiscal lever. The G20 reached an initial agreement in 2009 to ‘phase out and rationalise over the medium term inefficient fossil fuel subsidies’ (G20 2009), with members of the Asia-Pacific Economic Cooperation (APEC) group following suit (APEC 2009). In September 2016, China and the United States – the two largest greenhouse gas emitters – took that process another step forward by publicly releasing a voluntary peer-reviewed version of their fossil fuel subsidy reports (China 2015; G20 Peer Review Team 2016a, 2016b; United States 2015).

While the importance of subsidy reform is clear, widely varying estimates of subsidy magnitude and continuing battles over subsidy definitions slow reform efforts and complicate political consensus building. Differing coverage also affects reported figures: some assessments focus on subsidies to the consumption side of the market, others on producer subsidies and some on both. Global estimates vary by at least an order of magnitude, with a similar dispersion of country-specific estimates.

Beginning with a brief overview of the most common approaches to measure global subsidies to fossil fuels, this chapter discusses subsidy definitions, current global estimates, key causes of estimate variance and measurement gaps. Areas of common agreement are also presented; these are frequently broader than the numerical variance alone would suggest and are critical for successful reforms. The chapter concludes with several high-leverage opportunities for improving subsidy transparency going forward.

2.2 Measuring Global Subsidies to Fossil Fuels

Global subsidy estimates have relied on two main strategies: quantifying the value transferred to market participants from particular government activities (programme-specific or inventory approach)Footnote ¹ and assessing the variance between the observed and the ‘free market’ price for an energy commodity (price-gap approach). Each strategy has strengths and limitations (Table 2.1). To evaluate the impact of fossil fuel subsidies, data are generally aggregated into metrics of combined support that encompass many programme types, government institutions, levels of government and countries.

Inventories track individual subsidies, which helps to identify key political and economic leverage points for reform. However, the inventory approach does not delineate energy price impacts without significant additional analysis. Policy coverage across inventories may also differ due to definitional disagreements or data access problems.

Price-gap estimates do capture price effects. This approach has been used most prominently in recent years by the International Energy Agency (IEA). Because the approach requires less data than the inventories, it is useful for evaluating many countries at the same time, particularly when governments lack the capability or will to provide data on their market interventions. Price-gap results highlight countries with large pricing distortions; to develop a subsidy reform strategy, however, policy-specific information would be needed (Koplow 2015). Further, price-gap results provide only a partial picture. The many subsidies that boost industry profitability or allow marginal competitors to stay afloat – but do not affect equilibrium prices – are not captured. In addition, where energy resources are thinly traded, assessing an appropriate market reference price can be difficult. This is a particular challenge for network energy such as electric power, as well as fossil fuel–fired steam heat or natural gas delivery systems. Price-gap estimates should therefore be viewed as a lower bound of subsidy estimates (Koplow 2009).

Subsidy inventories compile programme-specific data on individual government supports to fossil fuels. The programme-level data can then be tallied to enhance transparency. The Organisation for Economic Co-operation and Development’s (OECD) total support estimate (TSE), for example, captures both pricing distortions (net market transfers) and transfers that do not affect end-market prices (net budgetary transfers) – effectively combining price-gap and inventory estimates. The TSE tracks individual policies on producer (via the producer subsidy equivalent (PSE)) and consumer (via the consumer subsidy equivalent (CSE)) sides of the market, allowing interactions to be evaluated. Government programmes that support the general structure of a particular fuel market – but not a specific producer or consumer – are tracked separately. The OECD’s approach is data intensive: their 2015 review of government support to fossil fuels included more than 800 subsidies provided by a diverse array of government agencies in OECD countries as well as in Brazil, Russia, Indonesia, India, China and South Africa (OECD 2015a).

Another approach to translate a subsidy inventory into a picture of market impacts is to simulate investment returns at the energy-asset level with and without individual subsidies. This technique highlights the degree to which the subsidies shift unprofitable projects into investable ones (Lunden and Fjærtoft Reference Lunden and Fjaertoft2014; Erickson et al. Reference Erickson, Downs, Lazarus and Koplow2017). Given the long capital life of most energy investments and the ability to continue production at lower prices once project capital has been ‘sunk’, this dynamic can lock society into multi-year carbon emissions. This approach can also quantify the level of subsidy ‘leakage’, where taxpayer money simply boosts the profits of projects that would have been profitable even without government support. These assessments provide highly granular information on subsidy transfer efficiency and environmental impacts, although they require detailed data on production sites and production economics that are not available for all fuels or all parts of the fuel cycle.

2.3 Defining and Identifying Energy Subsidies

As a starting point, most international organisations have adopted a subsidy definition developed by the World Trade Organization (WTO) under the Agreement on Subsidies and Countervailing Measures (see Chapter 7). The WTO definition captures much of the needed complexity in the range of policies to be tracked, including credit support, tax breaks and equity infusions (see also Steenblik Reference Steenblik2007; Jones and Steenblik Reference Jones and Steenblik2010).

In practice, however, there are important differences in coverage across institutions, and the exclusion of particular types of policies from quantitative estimates is fairly common. Sometimes (as with externalities; see Section 2.4.2), this is due to methodological disagreements or differing objectives of the analysis. Often, however, resource or data limitations preclude systematic evaluation of more complex types of interventions.

Exclusion of entire groups of policies from inventories (credit and insurance support are frequently left out) reduces the reported national and global subsidy estimates. Even price-gap estimates are likely affected, despite relying on price differentials rather than policy details. For thinly traded commodities, price-gap reference prices rely on estimates of the domestic cost structure, and missing information on subsidies can generate an artificially low reference price.

While definitional disagreements cannot be resolved in this chapter, understanding key mechanisms of support is useful. A common view of subsidies prevalent in the general press focuses on cash payments from the government to an individual or corporation. In reality, a wide array of mechanisms is deployed to transfer value to, and risks from, particular forms of energy, many of which do not involve cash. While some subsidies increase the return to a specific party directly, many work indirectly by changing the risk and reward profile of a particular activity or investment. The WTO definition distinguishes these by referring to the latter set as ‘support’ rather than ‘subsidies’. However, either approach boosts expected returns for some individuals, companies or products while worsening the market position of competitors.

Indeed, a core function of markets is to allocate risks and rewards among investors, producers and consumers. Many fossil fuel subsidies function by shifting risks away from energy producers or consumers. Common mechanisms include tax breaks, subsidised credit or insurance, trade restrictions, price controls and purchase mandates. Although investment, safety, price, geological and regulatory risks are not consistent across fuels, they are significant factors in energy markets overall. Thus, the same type of subsidy may affect particular fuel cycles in quite different ways. For example, remote oil fields or nuclear reactors are extremely expensive with long and uncertain build times. They are highly sensitive to the cost of capital as a result. Nuclear firms thus benefit greatly from subsidies in the form of loan guarantees and caps on accident risks; liquefied natural gas facilities would have a similar profile. Fuel costs will be more significant for coal-fired plants than for reactors or for renewable resources such as wind or solar that have no fuel costs.

While not all subsidy types are relevant to every situation, focusing only on cash grants greatly understates the complexity and magnitude of subsidy-related market distortions. Table 2.2 provides a comprehensive overview of the main types of transfer mechanisms and how well they are captured within current price-gap and inventory estimates of fossil fuel subsidies. The many categories underscore both the complexity of markets and the importance of tracking all transfer mechanisms to ensure an accurate picture of subsidy-related market distortions for each fuel cycle.

Many policies can act either as a tax or as a subsidy depending on the programme details and the associated market environment. If programme rules or disbursements change over time, the direction of impact can shift as well. Fees levied on oil and gas, for example, are often earmarked to support industry-related site inspections and cleanup or to fund infrastructure construction and maintenance. If the fees exceed these costs, they may partially act as a tax; if they cover only part of the cost, a residual subsidy will remain. Subsidies to energy consumers can sometimes act as a tax on producers, and vice versa. Teasing out these interactions is a significant challenge of subsidy measurement, although the OECD’s TSE approach has been effective in doing so.

For any specific company or energy asset, multiple subsidies are often at play, as beneficiaries try to maximise their subsidy flows across programme types and levels of government. This ‘subsidy stacking’ is sometimes limited by programme or tax rules but often is not. Subsidy stacking is common in both the private sector and with state-owned enterprises (SOEs), although in somewhat different forms. Private firms actively identify ways to tap into multiple lines of support. For SOEs, multiple levels of subsidies are often a side effect of their tax-exempt, taxpayer-supported operating environment.

Because SOEs are common in the energy sector (many countries even have a single, state-owned national champion dominating their oil and gas sector), including them in any subsidy review is critical. Indeed, SOEs play a larger role in the energy sector than in other parts of the economy. Of industrial sectors with the largest state-owned share worldwide, five of the six relate to fossil fuels: electricity, gas and steam for heat (27 per cent); oil and gas extraction (34 per cent); coal and lignite extraction (35 per cent); land transport and pipelines (40 per cent) and mining support activities (43 per cent) (Kowalski et al. Reference Kowalski, Büge, Sztajerowska and Egeland2013).

Annual budget allocations or bailouts to state firms are easy to spot. More complicated are subsidies to SOEs that become evident only when compared with a free-market baseline. SOEs may borrow money and pay interest, for example, but not at a market rate. They break even on operations, but this is far less than needed to generate a reasonable rate of return on billions in invested taxpayer capital. This lack of a required rate of return on public energy infrastructure can pose a large competitive impediment to innovative private energy providers who may be able to provide similar energy services in a cleaner or less-capital-intensive way (OECD 2016). SOEs sometimes pay no taxes, have inadequate insurance coverage or receive below-market access to publicly owned minerals. But these same institutions may also be mandated to provide low-cost energy to selected consumers or even housing for workers. Estimating the net effects of the subsidies against the cost-increasing social mandates on SOEs can be complex.

2.4 Current Estimates of Global Fossil Fuel Subsidies

This section reviews the current estimates of global subsidies to fossil fuels, the main causes of variance and some of the important data gaps and definitional issues behind these differing results. The most comprehensive estimates for global fossil fuel subsidies are published by the IEA, the OECD and the International Monetary Fund (IMF). The IEA evaluates government subsidies to fossil fuel consumers on an annual basis using the price-gap approach. The OECD uses its TSE approach to produce a biennial inventory of government support to fossil fuel producers, to consumers and to the general infrastructure that benefits the industry. The IMF approach blends estimates from both the IEA and OECD, supplements them with internal estimates for additional countries and generates a ‘pre-tax’ estimate of subsidy value. The IMF also prepares a ‘post-tax’ estimate, which includes an imputed national sales tax on fossil fuels for countries where the IMF felt that current levels were too low and negative externalities associated with fossil fuels and transport. Some of these adjustments remain controversial with other practitioners (see below).

Other organisations have conducted fossil fuel subsidy assessments over the years, although less systematically. The World Bank prepared global estimates during the early 1990s using an approach similar to that used by the IEA (Larsen and Shah Reference Larsen and Shah1992; Larsen Reference Larsen1994), although in recent years the Bank has focused primarily on country-specific assessments of energy market structure and functioning (Kojima Reference Kojima2016). Similarly, country-specific reviews are periodically completed by national governments or non-governmental organisations and often supplement the international assessments.

Table 2.3 compiles the most commonly referenced global energy subsidy estimates. Even the lowest figure amounts to many billions of dollars per year and a material share of global gross domestic product (GDP) – despite significant remaining coverage gaps in terms of countries, subsidy types, and levels of government (see Box 2.1). The upper-bound estimate is equal to more than 6 per cent of global GDP, a remarkable figure given that all global manufacturing comprised only 16 per cent of global GDP in 2012 (McKinsey 2012: 6).

At this scale, the fiscal demands of subsidising fossil fuels can sometimes crowd out other social objectives. Federal revenues provide a useful proxy for a country’s ‘sustainable budget constraint’, or the amount it can spend without taking on debt to support current operations. Twenty-two countries (60 per cent) in the IEA sample spent more than 10 per cent of available revenues on their fuel subsidies. Indeed, nearly half of those countries spent more to subsidise fossil fuel consumption than they did on public health (Koplow Reference Koplow, Halff, Sovacool and Rozhon2014). Subsidy flows are disproportionately captured not by the poor but by the middle and upper classes (Arze del Granado et al. Reference Arze del Granado, Coady and Gillingham2010; Coady et al. Reference Coady, Gillingham and Ossowski2010).

Distortions across fuels are also relevant, particularly in light of concerns over climate change. Fossil fuels continue to capture the majority of support. In 2015, IEA data indicated that despite continued growth in government support to renewable energy and declines in oil prices (such drops tend to bring down consumer fuel subsidies by default), the fossil-fuel-to-renewable-subsidy ratio was still 2:1. This ratio was nearly 4:1 in 2014 and more than 10:1 as recently as 2008 (IEA 2016: 99).

Immediately evident from Table 2.3 is the extremely wide range of estimates, running from USD 170 billion (OECD) to USD 5.3 trillion per year (IMF). These differences are the result of three key factors: (1) the types of policies captured, (2) the valuation approach and (3) the geographical coverage. For example, while the IEA and OECD both cover roughly 40 countries, the OECD captures primarily advanced economies, while the IEA captures many more developing nations. The IMF, meanwhile, covers more than 150 countries for some fuels. The valuation methods also differ, with high estimates dominated by the inclusion of wide-ranging externalities and imputed taxes. The policies evaluated in both the OECD and the IMF pre-tax estimates also affect the results, and neither captures credit support, insurance subsidies, inadequate user fees, site reclamation or net support to SOEs in a systematic manner.

These factors sometimes work in opposite directions. The OECD captures a wider array of subsidy policies than the IEA, which increases its estimate. But the OECD does not include countries such as Iran, Saudi Arabia and Venezuela, which in 2014 accounted for USD 180 billion of the total USD 493 billion in fossil fuel subsidies measured by the IEA (IEA 2015).

Based on Table 2.3, coal subsidies appear extremely small. The one exception, the IMF’s post-tax value, is driven by large health-related externalities linked to coal (see also Figure 2.2). Low values for coal in the other estimates are more an indication of research gaps than a real absence of public support. Support commonly extended to coal producers includes subsidised transport infrastructure, below-market sales of coal lease rights, credit support to mines and coal-fired power plants and inadequate funding or insurance for regulatory oversight, pit reclamation and black lung disease among miners. Subsidies throughout Eastern Europe and China to district heating – often fuelled by coal – are also quite high but not well captured in the current data set. This is a useful illustration of why a systematic review of all types of supports is needed to generate accurate data.

Figure 2.1 Composition of IMF post-tax estimates for oil

(Source: Coady et al. Reference Coady, Parry, Sears and Shang2015.)

Figure 2.2 Composition of IMF post-tax estimates for coal

(Source: Coady et al. Reference Coady, Parry, Sears and Shang2015.)

2.4.2 Subsidy ‘Adders’: Imputed Taxes and Externalities

IMF’s post-tax estimate includes two major additions to the fiscal subsidy estimates: ‘missing’ taxes and several large externalities. These adjustments touch on two significant methodological debates within the subsidy area and dramatically increased the IMF’s estimates.

The concept of ‘missing’ taxes is a logical one: where the general sales tax or value-added tax on fossil fuels is lower than the prevailing rate on other goods and services in that state or country, there is a strong case that this discrepancy constitutes a tax subsidy (and is treated as such in OECD’s inventory). Cross-country adjustments are much more complicated, particularly when baseline tax systems differ. On these, the OECD defers to the country’s baseline system. By contrast, the IMF imputes a consumption tax even in countries that do not have such a tax on anything. The valuation impacts are large: IMF figures (Coady et al. Reference Coady, Parry, Sears and Shang2015) show USD 45 billion in imputed taxes for the United States, more than three times their estimate for all pre-tax fiscal supports.

Fossil fuel extraction, transport, processing and consumption can be messy, with all sorts of emissions to air, water and land. Many of the environmental and health costs from these emissions are not reflected in the market price of the fuels, dampening the incentive to shift to cleaner alternatives. In an effort to adjust for these factors, the IMF post-tax subsidy value also includes estimates for two main groups of externalities: transport and pollution from fossil fuel consumption. Production impacts – such as spills, flaring of associated gas or ecosystem damage – are not evaluated.

The IMF approach has raised some methodological issues. First, transport-related externalities are attributed to fuels primarily because most of the transport vehicles today burn petroleum. This can be seen in Figures 2.1 and 2.3; although 12 per cent of total estimates for fossil fuel are transport externalities, this jumps to 44 per cent for oil. However, the causal factors of the externalities are not generally fuel specific. Road damage is a function of vehicle trips, vehicle weight and the quality of the roadbed. Congestion and accidents occur regardless of the fuel being used, and at least part of the external cost of congestion is being internalised by drivers through lost time.

Figure 2.3 Composition of IMF post-tax estimates for all fossil fuels

(Source: Coady et al. Reference Coady, Parry, Sears and Shang2015.)

The case for linking pollution externalities to fossil fuels is much stronger. The polluter-pays principle and economic efficiency both support the idea that external costs should be reflected in the prices of the activities that trigger them. This is not always easy to do. Much of the air pollution damage from fossil fuel–related activities is local or national rather than global. Accuracy requires many localised data inputs, something that the IMF (Coady et al. Reference Coady, Parry, Sears and Shang2015) has worked hard to build into their more recent estimates.

However, disagreement on which externalities to include, their massive scale and the variability across estimates have led some experts (Steenblik 2014) to argue that externalities should not be lumped in with fiscal subsidies but rather tracked as a separate category. This is a tracking issue, not one of importance: there is near-universal agreement that fossil fuel externalities are real and distorting energy markets. But keeping the values separate from fiscal subsidies has merit: externality figures are much larger than the pre-tax subsidies the IMF tabulated worldwide. Indeed, the IMF’s pre-tax subsidy values comprise less than 10 per cent of the total for oil, coal and all fossils and less than 20 per cent for natural gas. Yet, literature reviews of externality magnitudes by fuel cycle indicated large estimate variance (Kitson et al. Reference Kitson, Wooders and Moerenhout2011; Burtraw et al. Reference Burtraw, Krupnick and Sampson2012). Specifically, the high estimate for coal externalities was 155 times higher than the low estimate and for oil more than 400 times higher. Combining the fiscal subsidies and externality estimates risks marginalising the important policy reforms needed on the fiscal side. Further, the uncertainty across research efforts provides a political lever for industry to argue that nothing should be done without ‘further study’, delaying important structural transformation in the energy sector.

2.4.3 Intra-Country Variance: The Case of the United States

If subsidy evaluations use different sets of policy interventions in calculating subsidy value, numerical differences are inevitable. Looking at real data for a specific case helps to illustrate this issue more concretely. Figure 2.4 compares data on US fossil fuel subsidies from five different sources (from different parts of the US federal government, non-governmental organisations and industry) that catalogued intervention-level support. Figure 2.5 breaks estimates down by subsidy type.

Figure 2.4 Estimated US subsidies to fossil fuels (millions USD/year)

Note: Data years: 2013 (Energy Information Administration, Oil Change International), 2014 (OECD), average projected 2016–25 (US Treasury).

^* Federal subsidy estimates only; no sub-national data in totals.

ǂ Includes data for oil and gas only.

(Sources: Comstock Reference Comstock2014; Oil Change International 2014; US EIA 2015; OECD 2015a; United States 2015.)

Figure 2.5 Coverage disparity across subsidy types in the United States

^* Insufficient data to calculate credit subsidies. Face value of commitments to fossil fuel projects in 2013 was about USD 4.5 billion/year (Oil Change International 2014).

(Sources: Author’s analysis of Oil Change International 2014; OECD 2015a; United States 2015.)

The dispersion of US-specific estimates mirrors the global pattern in Table 2.3. Oil Change International, a non-governmental organisation, identified far more subsidies than did the other sources (USD 32.6 billion/year compared to USD 14.2 billion/year for the OECD and only USD 8.1 billion/year in the US government’s reporting to the G20). Although the US G20 self-review generated a much lower estimate than the OECD, it was still more than double the USD 3.5 billion estimated by the US Energy Information Administration for the fiscal year 2013 (US EIA 2015). This may partly be the result of different base years, although primarily it is a reminder that conflicts remain even within countries on how to identify and value subsidies. In the United States, this plays out in part by how the US Congress defines the allowable research scope the Energy Information Administration can use when it tabulates energy subsidies.

The zero value is put forth by Stephen Comstock, director of tax and accounting at the American Petroleum Institute. The institute is the largest trade association representing oil and gas interests in the United States. Comstock (Reference Comstock2014) noted that ‘[c]ontrary to what some in politics, the media and most recently, the president during the State of the Union, have said, the oil and natural gas industry currently receives not one taxpayer “subsidy”, “loophole” or “deduction”.’

Although this is a refutable statement and one that runs counter to many US federal agencies that have assessed US subsidies,Footnote ² Comstock is pursuing a classical political strategy to simply deny that key interventions are subsidies at all. Often this involves claims that the subsidised treatment of one’s own industry is part of the baseline tax system rather than a deviation. By introducing doubt, this approach can deflect attention away from subsidy removal, slowing or blocking reform efforts.

Blank categories in Figure 2.5 indicate research or data limitations rather than a real absence of subsidies. This issue is a global one: a review of subsidy data sources in China, Germany, Indonesia and the United States (Koplow et al. Reference Koplow, Jung, Lontoh, Lin and Charles2010) indicated that data gaps for the more complex subsidy mechanisms were common. For example, the OECD’s inventory does not yet track credit or insurance subsidies in its biennial review.

Within the United States, coverage of SOEs was fairly limited, even though many utilities are publicly owned and also reliant on fossil fuels. These utilities benefit from a wide array of government support via tax exemptions and subsidised credit and insurance, though often at the municipal rather than the federal level. Mineral access – which concerns lease competitiveness and reduced royalties – is not captured by the OECD or the US Treasury and is only partly captured by Oil Change International. Energy-related user fees are common at both the state and federal levels in the United States, often funding health and safety oversight of extraction sites and cleanup of improperly closed wells or mines or other similar fuel-specific damages. Credit and risk subsidies arise through insurance caps, transfer of health or reclamation risks to governments and subsidised borrowing for government-owned energy infrastructure. None of these areas are properly captured in the existing data on US fossil fuel subsidies. Industry-specific regulatory exemptions are a final, though challenging data gap. These exemptions are both extremely complicated to quantify and fairly common in the United States for oil and gas (Kosnik Reference Kosnik2007). While it may be unrealistic to expect a full subsidy inventory, comparing reporting by category can highlight the most important gaps to fill.

2.5 Subsidy Measurement: Areas of Agreement and the Path Forward

Despite a wide range of subsidy valuations, there is an emerging global consensus supporting fossil fuel subsidy reform in multiple areas. Many countries see important benefits domestically from unilateral reform. Incremental benefits from multilateral reform require consistent data reporting worldwide; while those benefits may not always outweigh parochial domestic interests, they help to overcome them. Even without full agreement on how every type of subsidy should be measured, there is growing alignment both on the types of policies that give rise to subsidies and on a significant range of valuation issues.

Perfect agreement on subsidy definition and valuation is unlikely a panacea, as political interests can still benefit by generating divergent estimates. Because gains to subsidy recipients tend to be concentrated, while the groups paying for them are diffuse, recipients can more easily mobilise and fund efforts to create and protect subsidy programmes (Victor Reference Victor2009). Part of that strategy may include slowing or blocking subsidy reporting or frequently challenging the official estimates. The incremental cost and research needed to value complex subsidy mechanisms such as risk transfer can extend the advantage of the incumbents.

As subsidy reporting and reform grow, however, the range of policies widely viewed as subsidies continues to grow with them. Groups harmed by subsidies can better gauge the benefits of removing distortions and often find reform allies in the finance ministries of their governments. The following overview highlights areas of progress and some important residual areas of disagreement.

2.6 Conclusion

Increasing international commitments to disclose and reform fossil fuel subsidies provide a backdrop against which subsidy reporting can continue to grow. International agreements are largely voluntary, but progress is rewarded with fiscal savings, economic efficiency in energy-intensive sectors and the alignment of fiscal policies with environmental goals. Near-term steps to accelerate the change should include mandating energy subsidy reporting to the OECD in the same way it is required for agriculture (Whitley and van der Burg Reference Whitley and van der Burg2015), broadening the peer review process of the G20 and APEC fossil fuel subsidy reports, expanding the OECD’s research mandate and funding to include credit subsidies and risk transfers and encouraging the US GASB to extend sub-national tax expenditure reporting into other types of subsidies and to international affiliates.

Increased coordination across international organisations is also needed to help streamline and accelerate subsidy transparency and reform. Despite the inevitable institutional challenges, a standing working group on subsidies including the IMF, World Bank, IEA and OECD should be established with a technical mission to identify and resolve key areas of reporting or measurement divergence. Useful initial areas on which to focus include price-gap calculations for network energy; the treatment of externalities in parallel with fiscal subsidies and ways to narrow the range of uncertainty on externality estimates; and accelerating and standardising the inclusion of credit and liability subsidies in existing inventories.

3.1 Introduction

Much of the world’s private sector receives support, interventions and subsidies from the public sector. In the case of energy subsidies (including those for fossil fuels), their use has been linked to energy security, domestic energy production and access to energy. In recent years, however, the heavy economic, social and environmental costs of subsidies for fossil fuels and the development of other means to achieve the same objectives have led to demands for their removal. High-level commitments to phase out fossil fuel subsidies have been made by the Group of 7 (G7), Group of 20 (G20), Asia-Pacific Economic Cooperation (APEC), North American Leaders’ Summit and EU countries, as well as in international agreements such as the United Nations Sustainable Development Goals (APEC 2009; European Commission 2011; United Nations 2015; G20 2016; G7 2017).

To increase understanding of the rationale and potential for phasing out fossil fuel subsidies, this chapter first outlines evidence of their economic, social and environmental costs, as well as the benefits of and opportunities for reform. It then synthesises lessons from the literature and from case studies on several countries that have made progress in phasing out subsidies before setting out the key ingredients for successful reform.

3.2 Economic, Social and Environmental Consequences of Fossil Fuel Subsidies

There are often valid public policy objectives for fossil fuel subsidies, including improved energy security, domestic energy services and access to energy. Production subsidies, for example, may temporarily sustain jobs in the oil and gas sectors, and consumption subsidies may help to improve access to (affordable) energy. The short-term benefits of subsidy reform may not be distributed evenly and depend on the approach and complementary measures adopted (see Section 3.3).

Nonetheless, evidence demonstrates that the costs of subsidies far outweigh their benefits and that less costly alternatives can achieve the same policy objectives (UNEP 2015). The interconnected economic, social, public health and environmental costs of fossil fuel subsidies are discussed in the following sections.

3.2.2 Social Consequences

Consumer subsidies are justified as a way to help poor households obtain access to energy. There is evidence, however, that fossil fuel subsidies are regressive, with their benefits accruing mainly to middle- and higher-income groups, while their costs are borne by the whole population (IEA 1999). A review by the International Monetary Fund (IMF) of subsidies in developing countries found that only 7 per cent of the benefits accruing from fossil fuel subsidies reached the poorest 20 per cent and that subsidies for gasoline (petrol) and liquefied petroleum gas (LPG) are particularly regressive (Figure 3.1).

Figure 3.1 The wealthy benefit most from fossil fuel subsidies in developing countries

(Source: Arze del Granado et al. Reference Arze del Granado, Coady and Gillingham2010.)

Fossil fuel subsidies often exacerbate inequalities, particularly in countries where most people lack access to electricity or commercial fuels and rely on biomass collected in rural areas or purchased at an unsubsidised cost in urban areas. These people do not share the benefits of lower prices for commercial energy, as subsidies tend to go to large, capital-intensive projects or to wealthier users, sometimes at the expense of support to smaller-scale biomass-based energy (van der Burg and Whitley Reference van der Burg and Whitley2016).

Subsidies may also prevent the poorest people from accessing energy. Where electricity production is based on fossil fuels, subsidies can create a disincentive to invest in the power sector because without this support the sector is unable to recover the full costs of production. On average, electricity tariffs in sub-Saharan Africa cover only 70 per cent of the cost of power production (Alleyne et al. Reference Alleyne, Josz and Singh2014), and such under-investment in the power sector contributes to poor access, transmission and distribution losses and persistent shortages (Alleyne et al. Reference Alleyne, Josz and Singh2014).

Subsidies also make households less likely to invest in energy-efficient equipment and appliances; when a fuel is subsidised, there is little savings incentive to buying more energy-efficient devices. The higher the rate of fuel or electricity subsidy, the longer the payback period for household investment in energy efficiency and the lower the likelihood of households making such investments (IEA 2014).

Energy subsidies often start as temporary income buffers. According to many governments, they aim to protect populations from international price hikes (Clements et al. Reference Clements, Coady and Fabrizio2013). In fact, governments may be less concerned about fluctuating energy prices than about resulting fluctuations in income (potential consumption) and its distribution. Since fossil fuel subsidies can aggravate inequality and undermine the capacity of the poorest to access energy, they may do more harm than good in protecting populations from volatile energy prices.

A significant proportion of spending on fossil fuel subsidies could be redirected to national economic or social development goals, such as improving health services and education, and financing the development of low-carbon infrastructure (Koplow Reference Koplow, Halff, Sovacool and Rozhon2014; van der Burg and Whitley Reference van der Burg and Whitley2016). In several countries, the levels of fossil fuel subsidies may be equivalent to, or exceed, expenditure on health (Figure 3.2). Many aid-recipient countries also subsidise fossil fuels at levels that exceed the official development assistance they receive (Whitley and van der Burg Reference Whitley and van der Burg2015).

Figure 3.2 G20 fossil fuel subsidies (pre-tax) in 2015 and health expenditures in 2014.

(Sources: Coady et al. (2015); and WHO (2015).)

3.3 The Benefits of, and Potential for, Fossil Fuel Subsidy Reform

The consequences of fossil fuel subsidies could be reversed by reforming these subsidies. A review of studies on the economic impact of reforming subsidies for the consumption of fossil fuels suggests that phasing them out would increase global real income or gross domestic product (GDP) by up to 0.7 per cent per year to 2050 (Ellis Reference Ellis2010). This benefit would not be spread equally, however, as fossil fuel importers would see rising GDP while producers would lose income. Given uncertainties about the exact impact of subsidy removal, these are only rough estimates, but they illustrate what is at stake.

The reform of fossil fuel subsidies could also generate health and environmental benefits. Several international organisations analysed data on fossil fuel consumption subsidies in developing countries and estimated that phasing out the subsidies between 2011 and 2020 would lower emissions of air pollutants that are harmful to public health and the environment (IEA et al. 2010). Limited evidence also suggests that the economic, social and environmental benefits of fossil fuel subsidy reform would exceed the transitional costs of such reform (Burniaux et al. Reference Burniaux, Château and Sauvage2011).

The Global Subsidies Initiative has found that removing fossil fuel consumption subsidies in 20 countries between 2017 and 2020 could reduce average national emissions by approximately 11 per cent (Merrill et al. Reference Merill, Bassi, Bridle and Christensen2015; see Chapter 8). Data for the G20 countries suggest that parallel emissions savings from the removal of subsidies for fossil fuel production could be roughly equivalent to eliminating all emissions from the aviation sector (Gerasimchuk et al. Reference Gerasimchuk, Bassi and Dominguez Ordonez2017).

Despite clear evidence of the costs of fossil fuel subsidies and the potential virtuous cycles that could result from their removal, governments are often reluctant to reform for several reasons (Whitley Reference Whitley2013; see Chapter 1). Some are explicit (or more openly discussed), such as a lack of information, whereas others are implicit and include the influence of special interests. Governments sometimes subsidise fossil fuels because they lack other effective means and institutional capacity to adopt more suitable policies (Victor Reference Victor2009). Taken together, these barriers to reform create inertia around subsidies, even in the context of new technological, economic and social developments (OECD 2007).

Despite the challenges of reform, several countries have made progress in reforming subsidies for fossil fuels across a number of sectors. Egypt, for example, raised fuel prices by 78 per cent in 2014 and will double electricity prices over the next five years (see Chapter 15); Indonesia raised petrol and diesel prices by an average of 33 per cent in 2013 and by another 34 per cent in 2014 (see Chapter 11) and India eliminated liquefied petroleum gas subsidies in 2014 (see Chapter 12).

Based on the work of the IMF, World Bank and other international organisations, Table 3.1 summarises important fossil fuel subsidy reforms across a range of countries and sectors, highlighting drivers that are relevant to different national contexts.

3.4 Key Principles for Fossil Fuel Subsidy Reform

A growing body of policy recommendations based on past experiences highlights different important factors for robust subsidy reform (across all sectors). While there is no single recipe for success, the prospects for sustained reforms can be enhanced by adherence to basic principles and by recognising national circumstances and changing regional and international market conditions.

Because subsidies are mainly provided at the national and sub-national levels, reform guidance must be country or context specific. Specific elements of a subsidy reform process contribute to its effectiveness and sustainability, as observed during the subsidy reform in some countries and as outlined in policy recommendations from international organisations and non-governmental organisations (NGOs) such as the Global Subsidies Initiative. These elements are a ‘whole-of-government’ approach, research and analysis, consultation and communication, mobilising resources, complementary measures (for sectors and households), phasing in and linking to wider reform processes.

3.5 Conclusion

Fossil fuel subsidies can inhibit sustainable economic development by creating a burden on government budgets, using resources that could be put to more efficient use within the economy, discouraging investment in renewable energy and energy efficiency, increasing the risk of stranded assets (in the event of climate change regulation), damaging public health by increasing air pollution and undermining carbon price signals.

Despite the challenges associated with reform, several countries have recently made significant progress in reforming subsidies for fossil fuels across a wide range of sectors. This chapter discussed several cases which, in conjunction with wider research on the processes of reforming subsidies, can help to identify the key ingredients for successful reform. These steps are very similar to those needed for any effective processes of policy change.

Although this chapter has highlighted the opportunities and processes for reforming fossil fuel subsidies at the national level, international cooperation is supporting national reform efforts in several ways. International efforts have identified and estimated the cost of subsidies, provided country-level support for reform processes and helped with coordination, lessons learned and advocacy.

The high-level commitments to reform made by the G7, G20, APEC and European countries, as well as key international agreements (see Chapter 5), present an opportunity for existing activities to be scaled up and for new efforts to be developed to (1) improve the availability of comparable information on fossil fuel subsidies, (2) increase technical and financial support for national reform efforts and (3) widen and strengthen countries’ commitments to reform.

Agencies such as the World Bank and bilateral donors are already providing resources and finance for complementary measures in developing countries, such as support for health services, education, social protection, energy-sector development and economic diversification. But it is seldom done in a way that links to subsidy reform processes. It is important to increase these resources and to foster linkages between existing support mechanisms and the processes and benefits of fossil fuel subsidy reform.

4.1 Introduction

This chapter situates the contemporary policy and academic debate about the politics of fossil fuel subsidies and their reform within a wider historical and material context. Fossil fuel subsidy reform represents a prerequisite for any serious attempt to dismantle the fossil fuel economy and accelerate what is being referred to openly as an ‘energy revolution’ (Greenpeace 2015) or more specifically as a ‘clean energy revolution’ (Climate Group 2016). Yet it is ultimately just one of a series of political moves and interventions in a hotly contested political terrain over energy futures, a space dominated by some of the most powerful governments and corporations in the world, but increasingly also occupied by new social movements. Understanding this terrain and locating fossil fuel subsidy reform’s place in the broader politics of decarbonisation help to provide a clearer sense of the challenges that face reform initiatives. They can also highlight where such initiatives might thrive and ride on the back of other waves of reform eroding the bedrock of fossil fuel power that has held such sway over the global economy over the last century (Mitchell Reference Mitchell2011; Huber Reference Huber2013).

This requires an understanding of the politics and political economy of energy transitions because fossil fuel subsidy reform is seen as a key lever to accelerate a transition to a low-carbon economy. But reforms to subsidy regimes also touch upon the deeper politics of transformations to sustainability (Scoones et al. Reference Scoones, Leach and Newell2015), since energy use is so closely tied to all other aspects of sustainability, such as food, water, housing and transportation. This has been brought to the fore by the 2015 Sustainable Development Goals, which demand simultaneous action on land, food, agriculture, water and energy – domains where questions of access, security and sustainability give rise to political trade-offs among competing demands and pathways. Because of these connections, the decisions on which forms of energy production and consumption are supported and subsidised, or transitioned away from, have wide-reaching and highly uneven implications for the economy and society as a whole. It is therefore unsurprising that the politics of fossil fuel subsidy reform serve as a lightning rod for the expression of a wide range of social concerns and economic interests.

In this sense we need to think about fossil fuel subsidy reform as part of a wider societal challenge because the forces, actors and institutions who oppose and support it are also powerful actors in broader debates about energy transitions and transformations towards sustainability. To use an analogy, we might prune the branches and dead leaves with fossil fuel subsidy reform, but the trunk of the tree (or the fossil fuel economy) could remain sturdy, with roots that spread and branches that grow back in different directions. Our use of the term ‘regime’ to describe the organisation of fossil fuels in the global economy differs both from the way in which it is used by some scholars to refer to national-level transition processes (Geels and Schot Reference Geels and Schot2007) and by other scholars to refer to norms, rules and decision-making procedures within international institutions (Krasner Reference Krasner1983). We instead refer to the mutually reinforcing assemblage of actors, institutions, infrastructures and webs of finance that work together to enable the global fossil fuel economy to function.

Evidence of the depth and reach of the fossil fuel regime’s power is not hard to find. It manifests itself in the gaping chasm between government policies proposed thus far and the types of action that science suggests is necessary to keep global warming below dangerous levels. In the wake of the adoption of the much-feted 2015 Paris Agreement, it has become clear that the nationally determined contributions that are on the table leave us on course for warming of up to 3.4°C (UNEP 2016). Recognising the extent of the depth and reach of fossil fuel incumbency also helps us understand why, in spite of the evidence of potentially catastrophic climate change, governments and corporations still invest heavily in fossil fuels and support their extraction and use through fossil fuel subsidies. Indeed, the power of the fossil fuel industries to secure benefits for themselves is reflected in the distribution of fossil fuel subsidies. The figures are a constantly moving target depending on the prices of fossil fuels and which policies and measures are defined as subsidies (Sovacool Reference Sovacool2017; see Chapter 2). Whichever way you look at it, though, the numbers are huge. The International Monetary Fund (IMF) reported that in 2015 fossil fuel subsidies (including the non-pricing of externalities) amounted to USD 5.3 trillion. This equates to USD 145 billion per day, USD 600 million per hour, USD 10 million per minute and USD 168,000 per second (IMF 2015). Beyond the vast scale of the subsidies, what is notable is the imbalance in favour of fossil fuels compared to other forms of energy production. A 2017 report from several non-governmental organisations (NGOs) suggested that Group of 20 (G20) countries provided four times as much public finance to fossil fuels as they did to clean energy (Oil Change International et al. 2017). With declining costs and an anticipated rise in end-user electricity prices by the 2030s, they predicted that global subsidies to renewables are on a declining trend.

So how do we account for this level of systemic organised bias in favour of fossil fuel energy sources and pathways?

4.2 Thinking about Incumbency

One seemingly obvious place to look for answers to this question is the rich literature on socio-technical transitions, much of which addresses questions regarding the role of innovative niche technologies in driving energy transitions and, more recently and to a lesser degree, questions of the political economy of energy transitions (Baker et al. Reference Baker, Newell and Phillips2014; Newell and Phillips Reference Newell and Phillips2016). A recent key focus in these literatures has been on the ‘destabilisation’ of fossil fuel regimes (Turnheim and Geels Reference Turnheim and Geels2012, Reference Turnheim and Geels2013), where the reduction of subsidies to fossil fuels is one policy instrument that is particularly significant in fostering ‘creative destructive’ policy mixes that simultaneously promote renewables and withdraw support from fossil fuel incumbents (Kivimaa and Kern Reference Kivimaa and Kern2016).

In order to promote the ‘undoing’ of fossil fuel regimes, though, it is necessary to have a deeper understanding of the broader relations through which fossil fuels remain ‘locked in’ (Unruh Reference Unruh2000; Erickson et al. Reference Erickson, Kartha, Lazarus and Tempest2015). There are two interlinked discussions in this broader literature that are particularly pertinent to understanding issues around fossil fuel subsidies and their reform. First, there is increasing focus on understanding incumbency in socio-technical systems. This has involved looking at the ways in which relations of incumbency slow or constrain transitions to low-carbon futures, including the financial, technological and institutional mechanisms through which fossil fuel industries are maintained and which need to be undone in order to accelerate sustainable transitions. Second, the role of national contextual and institutional factors (Andrews-Speed Reference Andrews-Speed2016; Lockwood et al. Reference Lockwood, Kuzemko, Mitchell and Hoggett2016) and, to a lesser extent, the role of the state (Meadowcroft Reference Meadowcroft2011; Johnstone and Newell 2017) are increasingly acknowledged as enabling and constraining forces within the literature on socio-technical transitions. These two aspects – the politics of incumbency and the role and nature of the state – afford important insights into the dynamics of fossil fuel subsidies and their reform. We briefly outline them below.

Until recently, research on sustainability transitions was focused on how new, low-carbon energy technologies such as wind and solar can be protected, developed and nurtured (Schot and Geels Reference Schot and Geels2008). However, attention has shifted towards the resistance of incumbent fossil fuel–based actors to low-carbon transformations (Geels Reference Geels2014) given the increasing urgency around the need for climate change mitigation and a recognition that dominant actors in current carbon-intensive energy systems are actively slowing transitions towards low-carbon futures (Smink Reference Smink2015). This literature has explored broader understandings of the lock-in of fossil fuel regimes that take into account the political dynamics that work to sustain incumbent energy pathways.

Analysis of the role of incumbent actors therefore has become an important strand of enquiry, as countering their power politically will be an important part of weakening the fossil fuel regime to bring about a sustainable transition. Fossil fuel subsidies help fossil fuels maintain a privileged status in energy systems. Campaigns and actions to end these mechanisms form an important part of the ‘weakening’ or ‘destabilisation’ of the fossil fuel regime (Turnheim and Geels Reference Turnheim and Geels2012). Recent studies have looked at the lobbying strategies of incumbent actors and how they secure preferential policy treatment by making full use of privileged access to politicians (Smink et al. Reference Smink, Hekkert and Negro2013; Wesseling Reference Wesseling2015). It is through such channels of privileged access and institutional work that fossil fuel subsidies are maintained. Researchers have also found that ‘political coalitions’ play a crucial role in fossil fuel incumbency, spanning across political party lines and forming powerful pressure groups that influence national and international policy alike (Newell and Paterson Reference Newell and Paterson1998; Hess Reference Hess2014).

This draws important attention to how political lobbying significantly constrains transformations towards a low-carbon future. The diffusion of sustainable technologies is unlikely to bring about a sustainable transition any time soon without simultaneous removal of the privileged positions of fossil fuel industries. However, such research often focuses solely on the strategies of certain actors within the energy sector when in fact it is through ostensibly ‘non-energy-related’ domains – including state institutions and cross-sectoral and institutional alliances – where some of the most persistent sticking points to a sustainable transition are found. Attention to these ‘non-energy’ areas has been opened up by recent work in sustainability transitions on political-economic and institutional perspectives to understand how broader contextual factors of a given policy setting influence the directionality of transitions (Hansen and Coenen Reference Hansen and Coenen2015; Andrews-Speed Reference Andrews-Speed2016; Kuzemko et al. Reference Kuzemko, Lockwood, Mitchell and Hoggett2016; Lockwood et al. Reference Lockwood, Kuzemko, Mitchell and Hoggett2016). Such contextual factors include the nature of electoral systems and coalition politics, degrees of federalism and decentralisation and the distinct form that national-level policy processes take.

Incumbency goes beyond particular lobbying activities undertaken by fossil fuel actors in one sector, and researchers are beginning to identify the different ‘locations’ through which incumbency is maintained, whether it is through state institutions or financial and military-related interests (Johnstone and Newell Reference Johnstone and Newell2018). For example, Cox et al. (Reference Cox, Johnstone and Stirling2016) describe the ‘deep incumbency complex’ to understand the United Kingdom’s energy policy in terms of cross-sectoral and distributed relations between a number of often seemingly disparate actors. Likewise, Baker et al. (Reference Baker, Newell and Phillips2014) draw on Fine and Rustomjee’s (Reference Fine and Rustomjee1996) work on the ‘minerals-energy-complex’ to understand how incumbency frustrates transitions to a low-carbon economy in South Africa. They employ this concept to understand power and key networks in South Africa’s political economy. These networks are a product of the historical alignment of social forces, which are organised around the provision of cheap energy to producers of minerals and energy. This creates a deep dependence of the state upon particular modes of accumulation for securing its legitimacy and retaining power (see also Chapter 13). This research draws attention to the kinds of relations that can get overlooked when focusing on a particular sector (such as energy) as a tightly bound domain.

4.3 The ‘Ungovernance’ of Energy Globally

Incumbency is not confined to domestic politics. The power of the fossil fuel regime is also manifest in the global governance and ungovernance of fossil fuels. ‘Ungovernance’ refers to areas of deliberate neglect – where policies and interventions are consciously not considered or pursued through self-censure because of the anticipated reaction of powerful incumbent actors and informed by previous experience. As Phillips and Newell (Reference Phillips and Newell2013: 654) put it: ‘Un-governed areas of energy policy are often as revealing of the exercise of power as areas where there explicit policy is in place.’ In the arena of fossil fuel subsidy reform where there have been interventions, much of the momentum for change has come from initiatives such as the Global Subsidies Initiative (Victor Reference Victor2009; see Chapter 10). The World Bank, IMF, Organisation for Economic Co-operation and Development (OECD) and other global governance actors are also heavily involved, suggesting a potentially important role for global energy governance.

Yet, despite the G20 fossil fuel subsidy reform commitment from 2009 (see Chapter 5), global energy governance remains weak in terms of appropriately regulating fossil fuel industries in line with the scale and urgency of the climate change problem. For example, the World Bank – a key actor promoting fossil fuel subsidy reform and governing climate finance – continues to provide high levels of finance to fossil fuels, indeed doubling its funding for fossil fuels between 2011 and 2015. It has provided USD 1.7 billion in total investments for exploration or projects that included an exploration component during these years (Oil Change International 2016), despite its ambition to lead the world on climate change (Mathiesen Reference Mathiesen2015). It is clear that the purpose of existing global bodies with a direct mandate to address energy issues revolves around ‘market-enabling’ rather than ‘market-restricting’ measures. While bodies such as the International Energy Agency (IEA), World Bank and OECD have promoted fossil fuel subsidy reform (albeit in different ways; see Skovgaard Reference Skovgaard2017), their ideological preferences to achieve decarbonisation through pricing, innovation and technology development and transfer exclude the possibility of interventions aimed at directly regulating access to remaining reserves of fossil fuels. The more proactive governance of energy finance in the form of loans, aid, investment or subsidies across public and private domains has thus far been notable by its absence (Newell Reference Newell2011).

The observed underdevelopment of global energy governance is unsurprising given the proximity of energy to core state strategy; its centrality to security and growth, as noted earlier, make it a central political priority. This is not to rule out an important future role for institutions of global governance in setting new rules and regulations or coordinating attempts at fossil fuel subsidy reform by international institutions (Van de Graaf and van Asselt Reference Van de Graaf and van Asselt2017). In the meantime, though, given the political sensitivities that surround the issue of stricter regulation of fossil fuel subsidies, there is an unsurprising emphasis on voluntary approaches, such as voluntary peer review of fossil fuel subsidy reform within the G20 (Gerasimchuk Reference Gerasimchuk2013). At the same time, key international regimes such as the United Nations Framework Convention on Climate Change and the World Trade Organization have avoided addressing fossil fuel subsidies directly (see Chapters 7 and 8).

4.4 Political Tipping Points?

Despite the challenges and barriers to sustainability transitions created by the depth and scope of fossil fuel incumbency both at the nation-state level and at the global level, one question that looms large is whether we are now approaching a key conjuncture in the demise of the global fossil fuel regime (Leggett Reference Leggett2014). Initiatives to reform fossil fuel subsidies are central to this question, as are declining oil prices and (contested but prevalent) claims of peak oil, with even the Organization of the Petroleum Exporting Countries making statements regarding the importance of diversifying their energy mixes. Further indicators of an emerging political tipping point away from fossil fuels might be the growing power of the divestment movement and moves from universities, pension funds and sovereign wealth funds to discontinue investments in these industries. This has been combined with greater pressure on companies to disclose their carbon assets and a wave of shareholder activism (Newell Reference Newell2008). There are shifting perceptions among some investors about the long-term future of fossil fuels amid concerns over stranded assets, despite the bullish attitude of oil majors such as ExxonMobil about the security of their investments. Carbon Tracker (2013) suggests that as much as 80 per cent of coal, oil and gas reserves are now unburnable from a climate point of view. The falling costs of solar in particular make renewables cost competitive with fossil fuels. Pressure from the international climate regime in the wake of the Paris Agreement and statements from the Group of 7 that fossil fuel emissions should not be allowed in any sector of the economy by the end of the century send clear signals about the overall direction of change. There are also the increasing successes of climate justice movements to leave fossil fuels in the ground. Pressure to reform fossil fuel subsidies has to be seen against this broader confluence of pressures to transform the fossil fuel economy.

Should they choose to, states can use plenty of levers to accelerate decarbonisation through and beyond fossil fuel subsidy reform. Trade regimes could contain provisions aimed at reducing fossil fuel subsidies (see Chapter 7), and border adjustment measures could reduce the unfair competitive advantage enjoyed by fossil fuel–intensive energy sectors, such as cement and steel, that are not subject to carbon constraints. Other state-led measures that could be used to reorient broader industrial interests around a lower-carbon economy include the more widespread use of local content requirements, infant industry protection, carbon taxes and, where necessary, subsidies that have been so critical to reducing the role of fossil fuels in energy systems in countries such as Germany, Spain and the United Kingdom. There are clearly opportunities to create new sites of accumulation and opportunities for powerful fractions of capital to provide new models of growth along the lines of ‘climate capitalism’ (Newell and Paterson Reference Newell and Paterson2010).

The experience of fossil fuel subsidies to date illustrates the need to engage with the social justice dimensions entailed in the decarbonisation of the economy. This means minimising impacts on the poor, who may be disproportionately hit by the removal of fossil fuel subsidies. Dampening the impacts of fossil fuel decline on workers and communities can be enacted by using a mix of safety nets, vouchers and cash transfers (see Chapters 3 and 12). This implies developing and negotiating explicit social contracts for sustainability transitions with losers as well as winners, including compensation and severance packages, as has occurred in Poland, or (re-)training assistance, which is currently a contested terrain in China in the face of closures of coal plants (Whitley and van der Burg Reference Whitley and van der Burg2015; see Chapter 2). Also as a means of enacting a ‘just transition’, some governments have sought to impose social obligations on investors through, for example, Black Economic Empowerment criteria in South Africa’s Renewable Energy Independent Power Producer Procurement Programme (Baker et al. Reference Baker, Newell and Phillips2014), or by developing regional economic development programmes (as has been done in Germany) to manage transitions away from fossil fuels in more equitable ways (Pegels and Lütkenhorst Reference Pegels and Lütkenhorst2014).

We are seeing these issues play out in struggles over fossil fuel subsidy reform as attempts to dislodge incumbent power proliferate. There is a huge sensitivity to the social base of state power; poorer groups and movements can destabilise regimes over changes to fossil fuel regimes, as we have seen in Bolivia and Nigeria. More successful initiatives appear to be those which work with the grain of differing political economies and go beyond the issue of reducing carbon emissions – and towards recognising broader sustainability issues that must be considered when moving away from fossil fuels, including sustaining the jobs, livelihoods and skills of those dependent on those very industries. In other words, there are limits to one-size-fits-all policy prescriptions to fossil fuel subsidy reforms if they are not seen in this broader, long-term sustainability perspective, in which there is explicit recognition and treatment of the economic, social and environmental dimensions of reform.

4.5 Conclusion

In conclusion, we have seen how fossil fuel subsidy reform is an important site in the struggle to decarbonise the global economy. But it should be understood as only one tool, albeit an important one, to achieving a broader transformation. We examined the relations of incumbency related to fossil fuel industries to demonstrate how the same state institutions upon which we depend for a range of redistributional purposes are often fully embedded within broader networks of power that sustain fossil fuel economies. Thus, transformative change is unlikely through the sole focus on particular economic instruments that support certain industries but instead relies on reconfiguring the broader networks and uneven power relations upon which these instruments depend.

Experience to date is revealing of the broader political challenges around just transitions and the need to address the social justice dimensions of climate action. Multiple dimensions are entailed in the challenges of dislodging the global fossil fuel regime: political, institutional, material, economic and socio-cultural – and there needs to be active engagement on all fronts. Clearly, there are positive signs of progress, yet many challenges remain. While we see potential tipping points in the rise of social movements and powerful campaigns to eliminate fossil fuel subsidies – as well as the sensitisation of investors to the risks associated with continued investments in fossil fuels – the next crucial step will be when such calls are combined with regulation of access to remaining reserves of fossil fuels. Without this, it may be that the rate of sustainability transitions continues to lag behind the urgency articulated by climate goals. History suggests that such transformations take decades or centuries but that they always seem impossible until they are achieved.

Acknowledgements

We are grateful to the reviewers and editors of this volume for their comments on an earlier draft of this chapter.